XMEX:APOL Apollo Education Group Inc Class A Quarterly Report 10-Q Filing - 2/29/2012

Effective Date 2/29/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: February 29, 2012
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from [ ] to [ ]

Commission file number: 0-25232
APOLLO GROUP, INC.
(Exact name of registrant as specified in its charter)

ARIZONA
(State or other jurisdiction of incorporation or organization)
86-0419443
(I.R.S. Employer Identification No.)

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive offices, including zip code)
(480) 966-5394
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
YES þ     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
  (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
 YES o     NO þ
AS OF March 19, 2012, THE FOLLOWING SHARES OF STOCK WERE OUTSTANDING:

Apollo Group, Inc. Class A common stock, no par value
120,169,000 Shares
Apollo Group, Inc. Class B common stock, no par value
475,000 Shares
 



APOLLO GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX



2


Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Managements Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Group, Inc. (“the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include but are not limited to:

changes in the regulation of the U.S. education industry and eligibility of proprietary schools to participate in U.S. federal student financial aid programs, including the regulatory and other requirements discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2011, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs,” and “Regulatory Environment”;

each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2011 and Part II, Item 1A, Risk Factors, in this Form 10-Q; and

those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2011 and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q.

The cautionary statements referred to above also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.



3


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
($ in thousands)
February 29, 2012
 
August 31, 2011
ASSETS:
Current assets
 

 
 

Cash and cash equivalents
$
800,733

 
$
1,571,664

Restricted cash and cash equivalents
372,953

 
379,407

Accounts receivable, net
207,127

 
215,567

Restricted funds held for legal matter
145,000

 

Prepaid taxes
8,074

 
35,629

Deferred tax assets, current portion
113,418

 
124,137

Other current assets
45,318

 
44,382

Total current assets
1,692,623

 
2,370,786

Property and equipment, net
570,004

 
553,027

Marketable securities
5,946

 
5,946

Goodwill
151,488

 
133,297

Intangible assets, net
167,038

 
121,117

Deferred tax assets, less current portion
76,649

 
70,949

Other assets
25,854

 
14,584

Total assets
$
2,689,602

 
$
3,269,706

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities
 

 
 

Short-term borrowings and current portion of long-term debt
$
33,694

 
$
419,318

Accounts payable
86,916

 
69,551

Accrued liabilities
394,290

 
398,806

Student deposits
408,921

 
424,045

Deferred revenue
302,787

 
293,436

Other current liabilities
55,785

 
50,131

Total current liabilities
1,282,393

 
1,655,287

Long-term debt
93,816

 
179,691

Deferred tax liabilities
24,065

 
26,400

Other long-term liabilities
205,767

 
164,339

Total liabilities
1,606,041

 
2,025,717

Commitments and contingencies


 


Shareholders’ equity
 

 
 

Preferred stock, no par value

 

Apollo Group Class A nonvoting common stock, no par value
103

 
103

Apollo Group Class B voting common stock, no par value
1

 
1

Additional paid-in capital
89,940

 
68,724

Apollo Group Class A treasury stock, at cost
(3,510,646
)
 
(3,125,175
)
Retained earnings
4,533,668

 
4,320,472

Accumulated other comprehensive loss
(27,566
)
 
(23,761
)
Total Apollo shareholders’ equity
1,085,500

 
1,240,364

Noncontrolling (deficit) interests
(1,939
)
 
3,625

Total equity
1,083,561

 
1,243,989

Total liabilities and shareholders’ equity
$
2,689,602

 
$
3,269,706

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
Net revenue
$
969,552

 
$
1,048,629

 
$
2,148,242

 
$
2,375,064

Costs and expenses:
 

 
 

 
 

 
 
Instructional and student advisory
429,500

 
421,644

 
886,297

 
877,456

Marketing
159,254

 
157,215

 
325,099

 
323,358

Admissions advisory
101,405

 
102,283

 
202,793

 
216,035

General and administrative
84,000

 
84,344

 
163,944

 
169,218

Depreciation and amortization
41,985

 
39,142

 
88,283

 
76,244

Provision for uncollectible accounts receivable
30,996

 
45,540

 
72,579

 
102,449

Restructuring and other charges
16,148

 

 
21,710

 
3,846

Goodwill and other intangibles impairment

 
219,927

 
16,788

 
219,927

Litigation charge

 
1,574

 

 
2,455

Total costs and expenses
863,288

 
1,071,669

 
1,777,493

 
1,990,988

Operating income (loss)
106,264

 
(23,040
)
 
370,749

 
384,076

Interest income
277

 
785

 
866

 
1,768

Interest expense
(1,789
)
 
(1,654
)
 
(3,788
)
 
(3,824
)
Other, net
217

 
313

 
358

 
259

Income (loss) from continuing operations before income taxes
104,969

 
(23,596
)
 
368,185

 
382,279

Provision for income taxes
(43,798
)
 
(76,052
)
 
(159,730
)
 
(245,631
)
Income (loss) from continuing operations
61,171

 
(99,648
)
 
208,455

 
136,648

Income from discontinued operations, net of tax

 
2,575

 

 
1,947

Net income (loss)
61,171

 
(97,073
)
 
208,455

 
138,595

Net loss attributable to noncontrolling interests
2,711

 
33,035

 
4,741

 
32,780

Net income (loss) attributable to Apollo
$
63,882

 
$
(64,038
)
 
$
213,196

 
$
171,375

Earnings (loss) per share — Basic:
 

 
 

 
 
 
 
Continuing operations attributable to Apollo
$
0.51

 
$
(0.47
)
 
$
1.67

 
$
1.17

Discontinued operations attributable to Apollo

 
0.02

 

 
0.02

Basic income (loss) per share attributable to Apollo
$
0.51

 
$
(0.45
)
 
$
1.67

 
$
1.19

Earnings (loss) per share — Diluted:
 

 
 

 
 
 
 
Continuing operations attributable to Apollo
$
0.51

 
$
(0.47
)
 
$
1.66

 
$
1.17

Discontinued operations attributable to Apollo

 
0.02

 

 
0.01

Diluted income (loss) per share attributable to Apollo
$
0.51

 
$
(0.45
)
 
$
1.66

 
$
1.18

Basic weighted average shares outstanding
125,298

 
142,354

 
127,808

 
144,364

Diluted weighted average shares outstanding
126,467

 
142,354

 
128,729

 
144,658

The accompanying notes are an integral part of these condensed consolidated financial statements.


5


APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
($ in thousands)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
Net income (loss)
$
61,171

 
$
(97,073
)
 
$
208,455

 
$
138,595

Other comprehensive income (loss) (net of tax):
 

 
 

 
 
 
 
Currency translation gain (loss)
3,729

 
1,871

 
(4,628
)
 
4,761

Change in fair value of auction-rate securities

 
463

 

 
463

Comprehensive income (loss)
64,900

 
(94,739
)
 
203,827

 
143,819

Comprehensive loss attributable to noncontrolling interests
2,540

 
32,791

 
5,564

 
32,125

Comprehensive income (loss) attributable to Apollo
$
67,440

 
$
(61,948
)
 
$
209,391

 
$
175,944

The accompanying notes are an integral part of these condensed consolidated financial statements.


6


APOLLO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FROM CONTINUING AND DISCONTINUED OPERATIONS
(Unaudited)
 
Six Months Ended
($ in thousands)
February 29, 2012
 
February 28, 2011
Cash flows provided by (used in) operating activities:
 

 
 

Net income
$
208,455

 
$
138,595

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Share-based compensation
40,492

 
30,490

Excess tax benefits from share-based compensation
(1,137
)
 
(569
)
Depreciation and amortization
88,283

 
76,244

Amortization of lease incentives
(7,668
)
 
(7,023
)
Amortization of deferred gains on sale-leasebacks
(1,399
)
 
(822
)
Goodwill and other intangibles impairment
16,788

 
219,927

Non-cash foreign currency gain, net
(295
)
 
(267
)
Provision for uncollectible accounts receivable
72,579

 
102,449

Litigation charge

 
2,455

Restructuring and other charges
21,710

 
3,846

Deferred income taxes
(9,843
)
 
843

Changes in assets and liabilities, excluding the impact of business acquisition and disposition:
 

 
 

Restricted cash and cash equivalents
6,454

 
(21,502
)
Accounts receivable
(64,093
)
 
(32,443
)
Prepaid taxes
27,529

 
(856
)
Other assets
(9,789
)
 
(9,399
)
Accounts payable and accrued liabilities
(10,110
)
 
(10,056
)
Student deposits
(13,777
)
 
2,831

Deferred revenue
8,551

 
(53,403
)
Other liabilities
11,749

 
21,305

Net cash provided by operating activities
384,479

 
462,645

Cash flows provided by (used in) investing activities:
 

 
 

Additions to property and equipment
(62,357
)
 
(81,422
)
Restricted funds held for legal matter
(145,000
)
 

Maturities of marketable securities

 
10,000

Acquisition, net of cash acquired
(73,736
)
 

Proceeds from disposition
3,285

 
6,250

Other investing activities
(1,694
)
 

Net cash used in investing activities
(279,502
)
 
(65,172
)
Cash flows provided by (used in) financing activities:
 

 
 

Payments on borrowings
(498,895
)
 
(419,454
)
Proceeds from borrowings

 
8,129

Apollo Group Class A common stock purchased for treasury
(386,716
)
 
(252,003
)
Issuance of Apollo Group Class A common stock
9,336

 
6,082

Noncontrolling interest contributions

 
6,875

Excess tax benefits from share-based compensation
1,137

 
569

Net cash used in financing activities
(875,138
)
 
(649,802
)
Exchange rate effect on cash and cash equivalents
(770
)
 
903

Net decrease in cash and cash equivalents
(770,931
)
 
(251,426
)
Cash and cash equivalents, beginning of period
1,571,664

 
1,284,769

Cash and cash equivalents, end of period
$
800,733

 
$
1,033,343

Supplemental disclosure of cash flow and non-cash information
 

 
 

Cash paid for income taxes, net of refunds
$
141,047

 
$
222,442

Cash paid for interest
$
4,859

 
$
5,590

Unsettled share repurchases
$
25,461

 
$

Credits received for tenant improvements
$
22,671

 
$
8,021

Capital lease additions
$
19,440

 
$
10,017

Restricted stock units vested and released
$
14,640

 
$
1,602

Acquired technology (Note 5)
$
14,389

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Nature of Operations
Apollo Group, Inc. and its wholly-owned subsidiaries and majority-owned subsidiaries, collectively referred to herein as “the Company,” “Apollo Group,” “Apollo,” “APOL,” “we,” “us” or “our,” has been an education provider for more than 35 years. We offer innovative and distinctive educational programs and services both online and on-campus at the undergraduate, master’s and doctoral levels through our wholly-owned educational institutions:
The University of Phoenix, Inc. (“University of Phoenix”);
Institute for Professional Development (“IPD”); and
The College for Financial Planning Institutes Corporation (“CFFP”).
On September 12, 2011, we acquired all of the outstanding stock of Carnegie Learning, Inc. (“Carnegie Learning”), a publisher of research-based math curricula and adaptive learning software. Refer to Note 5, Acquisitions.
In addition, we have an 85.6% ownership interest in Apollo Global, Inc. (“Apollo Global”) as of February 29, 2012. Apollo Global pursues investments primarily in the international education services industry and is consolidated in our financial statements. We offer educational programs and services through the following wholly-owned subsidiaries of Apollo Global:
BPP Holdings plc (“BPP”) in the United Kingdom;
Western International University, Inc. (“Western International University”) in the U.S.;
Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile; and
Universidad Latinoamericana (“ULA”) in Mexico.
On December 3, 2011, Apollo Global entered into an agreement with HT Media Limited, an Indian media company, to participate in a start-up, 50:50 joint venture intended to develop and provide educational services and programs in India. HT Media Limited, which is based in New Delhi, India, publishes the Hindustan Times, Hindustan and Mint newspapers, among other business activities.
Note 2. Significant Accounting Policies
Basis of Presentation
The unaudited interim condensed consolidated financial statements include the accounts of Apollo Group, Inc., its wholly-owned subsidiaries, and subsidiaries that we control. These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and, in the opinion of management, contain all adjustments, consisting of normal, recurring adjustments, necessary to fairly present the financial condition, results of operations and cash flows for the periods presented.
Certain information and note disclosures normally included in these unaudited interim condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Securities and Exchange Commission rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in Item 8, Financial Statements and Supplementary Data, in our 2011 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 20, 2011 in preparing these unaudited interim condensed consolidated financial statements.
The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this filing and the audited consolidated financial statements and notes thereto contained in our 2011 Annual Report on Form 10-K.
Our fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular years or quarters refer to our fiscal years and the associated quarters of those fiscal years.

8

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Our operations are generally subject to seasonal trends. We experience, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments. Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the other quarters due to holiday breaks. Because of the seasonal nature of our business and other factors, the results of operations for the three and six months ended February 29, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.
Recent Accounting Pronouncements
Issued Accounting Pronouncement
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), which simplifies how an entity tests goodwill for impairment. The standard permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Accordingly, an entity will no longer be required to calculate the fair value of a reporting unit in the step one test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted ASU 2011-08 on September 1, 2011 for our fiscal year 2012 goodwill impairment tests. We do not believe the adoption of ASU 2011-08 will have material impact on our financial condition or results of operations.
Future Accounting Pronouncements
The FASB and the International Accounting Standards Board (“IASB”) are working on joint convergence projects to address accounting differences between GAAP and International Financial Reporting Standards (“IFRS”) in order to support their commitment to achieve a single set of high-quality global accounting standards. Some of the most significant projects on the FASB and IASB’s agenda include accounting for leases, revenue recognition and financial instruments, among other items. Both the FASB and IASB have issued final guidance for certain accounting topics and are currently redeliberating guidance in other areas. The converged guidance that the FASB has already issued addressing fair value measurements, financial instrument disclosures and the statement of other comprehensive income is not expected to have a material impact on our financial condition, results of operations, or disclosures. While we anticipate the lease accounting and revenue recognition proposals will have the most impact on us, the FASB’s standard-setting process is ongoing and until new standards have been finalized and issued, we cannot determine the impact on our financial condition, results of operations, or disclosures that may result from any such future changes.
Concurrent with these convergence projects, the Securities and Exchange Commission is considering incorporating IFRS into the U.S. financial reporting system. At this time, the method and timing of potential conversion to IFRS is uncertain and cannot be determined until final conversion requirements are mandated. The potential preparation of our financial statements in accordance with IFRS could have a material impact on our financial condition, results of operations, and disclosures.
Note 3. Changes in Presentation
During fiscal year 2011, we changed our presentation of changes in restricted cash and cash equivalents related to financial aid program funds to cash flows from operating activities on our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations. We previously presented such changes as cash flows from investing activities. Our restricted cash and cash equivalents primarily represents funds held for students for unbilled educational services that were received from U.S. federal financial aid programs established by Title IV of the Higher Education Act and regulations promulgated thereunder (“Title IV”). When we receive such funds, they are recorded as restricted cash on our Condensed Consolidated Balance Sheets with an offsetting liability recorded as student deposits. These restricted funds are a core activity of our operations and, accordingly, we believe presentation of changes in such funds as an operating activity more appropriately reflects the nature of the restricted cash. Additionally, we believe that including both changes in the restricted cash asset and the student deposit liability within operating activities provides better transparency. We have changed our presentation on our Condensed Consolidated Statements of Cash Flows from Continuing and Discontinued Operations for all periods presented. The changes have no other impact on our financial position and results of operations.




9

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

The following table presents our cash flows as previously reported and as changed for the six months ended February 28, 2011:
($ in thousands)
As Reported
 
As Changed
Cash flows provided by (used in) operating activities:
 
 
 
Restricted cash and cash equivalents
$

 
$
(21,502
)
Net cash provided by operating activities
$
484,147

 
$
462,645

Cash flows provided by (used in) investing activities:
 
 
 
Restricted cash and cash equivalents
$
(21,502
)
 
$

Net cash used in investing activities
$
(86,674
)
 
$
(65,172
)
Note 4. Restructuring and Other Charges
We have implemented a number of important operational changes and initiatives to transition our business to more effectively support our students and enhance their educational outcomes. As part of this transition, we implemented a strategic reduction in force and a real estate rationalization plan in fiscal year 2011. These initiatives were designed to streamline our operations and better align our operations with our business strategy, refined business model and outlook. The following table details the charges incurred for the three and six months ended February 29, 2012 and February 28, 2011, and the cumulative costs associated with these initiatives, which have all been included in restructuring and other charges on our Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
Cumulative Costs for Restructuring Activities
($ in thousands)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
 
Real estate rationalization
 
 
 
 
 
 
 
 
 
   Lease obligation costs, net(1)
$
15,666

 
$

 
$
20,877

 
$

 
$
38,679

   Interest accretion
482

 

 
833

 

 
833

   Asset impairments

 

 

 

 
1,265

Reduction in force - Severance and other benefits

 

 

 
3,846

 
3,846

Restructuring and other charges
$
16,148

 
$

 
$
21,710

 
$
3,846

 
$
44,623

(1) Lease obligation costs, net represents the fair value of our future contractual lease obligations, net of future estimated sublease income as discussed further below, partially offset by the release of certain liabilities related to the leases such as deferred rent.
The following table details the changes in our associated restructuring liability during the six months ended February 29, 2012, which is included in other liabilities on our Condensed Consolidated Balance Sheets:
($ in thousands)
 
Balance at August 31, 2011
$
17,802

  Additions for lease obligations
22,692

  Interest accretion
833

  Payments
(3,005
)
Balance at February 29, 2012
$
38,322

During fiscal year 2011, we initiated a plan to rationalize our real estate portfolio in Phoenix, Arizona through space consolidation and reorganization. The plan consisted of abandoning all, or a portion of, four leased facilities, all of which we are no longer using and have determined we will no longer derive a future economic benefit. The facilities were classified as operating leases and we recorded charges representing the fair value of our future contractual lease obligations under the leases on the respective cease-use dates. The net charges associated with these abandonments were $15.7 million and $20.9 million during the three and six months ended February 29, 2012, respectively. We measured the lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future

10

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considered executed and expected sublease agreements, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates will be subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. During the first six months of fiscal year 2012, we also recorded charges for interest accretion associated with the lease obligations. All charges associated with these restructuring activities are included in our University of Phoenix reportable segment.
Note 5. Acquisitions
On September 12, 2011, we acquired all of the outstanding stock of Carnegie Learning, a publisher of research-based math curricula and adaptive learning software for a cash purchase price of $75.0 million. In a separate transaction completed on September 12, 2011, we acquired related technology from Carnegie Mellon University for $21.5 million, payable over a 10-year period. We incurred transaction costs of $1.7 million in connection with these acquisitions with the majority included in general and administrative expense in our fiscal year 2011 operating results. The acquisitions allow us to accelerate our efforts to incorporate adaptive learning into our academic platform and to provide tools to help raise student achievement in mathematics, which is expected to support improved retention and graduation rates at University of Phoenix. Given our postsecondary focus, we are currently evaluating strategic alternatives for a potential sale of the K-12 portion of the business in order to support Carnegie Learning’s continued success in this market, but have not yet committed to any specific plan of disposition.
We accounted for the Carnegie Learning acquisition as a business combination. Accordingly, we determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective assets and liabilities. We used the following assumptions, the majority of which include significant unobservable inputs, and valuation methodologies to determine fair value of the acquired assets and assumed liabilities:
Software technology and customer relationship intangible assets were valued using the cost savings approach utilizing current discount rates, cost estimates and assumptions;
The Carnegie Learning trademark was valued using the relief-from-royalty method, which represents the benefit of owning this intangible asset rather than paying royalties for its use;
Deferred revenue was valued using the cost plus mark-up approach, which estimates the fair value of our estimated cost to fulfill the obligation; and
The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
We recorded $34.8 million of goodwill as a result of the Carnegie Learning acquisition, which is not deductible for tax purposes. Carnegie Learning is included in our University of Phoenix operating segment and the goodwill is primarily attributable to expected strategic synergies. These synergies include cost savings and benefits attributable to improved student retention and graduation rates at University of Phoenix and the assembled workforce.
The following table presents a summary of the Carnegie Learning acquisition purchase price allocation:
($ in thousands)
 
Net working capital deficit
$
(336
)
Property and equipment
870

Intangible assets
 
    Finite-lived — Software technology
28,000

    Indefinite-lived — Trademark
14,100

    Finite-lived — Customer relationships
9,000

Goodwill
34,794

Deferred taxes, net
(11,428
)
Allocated purchase price
75,000

Less: Cash acquired
(1,264
)
Acquisition, net of cash acquired
$
73,736


11

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

We are amortizing the finite-lived software technology on a straight-line basis over a five year useful life, and the customer relationships asset on an accelerated basis over a four year useful life. The amortization of the respective finite-lived intangible assets reflects the pattern in which we expect the economic benefits of the assets to be consumed. We assigned an indefinite life to the acquired trademark as we believe the intangible asset has the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic, or other factors to limit the trademark’s useful life.
As noted above, we also acquired related technology from Carnegie Mellon University for $21.5 million, payable over a 10-year period. We accounted for this transaction as an asset purchase. Accordingly, we recorded an asset and corresponding liability totaling $14.4 million representing the present value of the future cash payments on the acquisition date using our incremental borrowing rate. The asset is included in intangible assets, net on our Condensed Consolidated Balance Sheets and is being amortized on a straight-line basis over a five year useful life. The liability is included in debt on our Condensed Consolidated Balance Sheets and is being accreted over the 10-year period, with the accretion expense recorded in interest expense on our Condensed Consolidated Statements of Operations.
Carnegie Learning’s operating results are included in our condensed consolidated financial statements from the date of acquisition. We have not provided pro forma information because Carnegie Learning’s results of operations are not significant to our consolidated results of operations.
Note 6. Accounts Receivable, Net
Accounts receivable, net consists of the following as of February 29, 2012 and August 31, 2011:
($ in thousands)
February 29, 2012
 
August 31, 2011
Student accounts receivable
$
309,708

 
$
324,324

Less allowance for doubtful accounts
(118,946
)
 
(128,897
)
Net student accounts receivable
190,762

 
195,427

Other receivables
16,365

 
20,140

Total accounts receivable, net
$
207,127

 
$
215,567

Student accounts receivable primarily represents amounts due related to tuition and educational services. The following table summarizes the activity in allowance for doubtful accounts for the three and six months ended February 29, 2012 and February 28, 2011:
 
Three Months Ended
 
Six Months Ended
($ in thousands)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
Beginning allowance for doubtful accounts
$
122,590

 
$
176,336

 
$
128,897

 
$
192,857

Provision for uncollectible accounts receivable
30,996

 
45,540

 
72,579

 
102,449

Write-offs, net of recoveries
(34,640
)
 
(61,994
)
 
(82,530
)
 
(135,424
)
Ending allowance for doubtful accounts
$
118,946

 
$
159,882

 
$
118,946

 
$
159,882



12

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Note 7. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed. Changes in the carrying amount of goodwill from August 31, 2011 to February 29, 2012 are as follows:
 
 
 
Apollo Global
 
 
 
 
($ in thousands)
University of Phoenix
 
BPP
 
Other
 
Other Schools
 
Total Goodwill
Goodwill as of August 31, 2011
$
37,018

 
$
50,694

 
$
30,275

 
$
15,310

 
$
133,297

Goodwill acquired(1)
34,794

 

 

 

 
34,794

Impairment(2)

 

 
(11,912
)
 

 
(11,912
)
Currency translation adjustment

 
(2,920
)
 
(1,771
)
 

 
(4,691
)
Goodwill as of February 29, 2012
$
71,812

 
$
47,774

 
$
16,592

 
$
15,310

 
$
151,488

(1) Goodwill acquired resulted from our acquisition of Carnegie Learning during the first quarter of fiscal year 2012. Refer to Note 5, Acquisitions.
(2) We recorded an impairment charge of $11.9 million of UNIACC’s goodwill during the first quarter of fiscal year 2012. See below for further discussion.
Intangible assets, net consist of the following as of February 29, 2012 and August 31, 2011:
 
February 29, 2012
 
August 31, 2011
($ in thousands)
Gross
Carrying Amount
 
Accumulated Amortization
 
Effect of Foreign
Currency Translation Loss
 
Net
Carrying Amount
 
Gross
Carrying Amount
 
Accumulated Amortization
 
Effect of Foreign
Currency Translation Loss
 
Net
Carrying Amount
Finite-lived intangible assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Software and technology(1)
$
42,389

 
$
(3,956
)
 
$

 
$
38,433

 
$
3,600

 
$
(3,450
)
 
$

 
$
150

Student and customer relationships(1)
14,109

 
(4,450
)
 
(1,389
)
 
8,270

 
9,477

 
(6,538
)
 
(1,284
)
 
1,655

Copyrights
20,891

 
(14,205
)
 
(733
)
 
5,953

 
20,891

 
(11,521
)
 
(422
)
 
8,948

Other(2)
12,878

 
(9,355
)
 
(1,175
)
 
2,348

 
15,102

 
(9,049
)
 
(1,166
)
 
4,887

Total finite-lived intangible assets
90,267

 
(31,966
)
 
(3,297
)
 
55,004

 
49,070

 
(30,558
)
 
(2,872
)
 
15,640

Indefinite-lived intangible assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Trademarks(1), (2)
108,961

 

 
(3,846
)
 
105,115

 
98,849

 

 
(737
)
 
98,112

Accreditations and designations(2)
7,260

 

 
(341
)
 
6,919

 
7,456

 

 
(91
)
 
7,365

Total indefinite-lived intangible assets
116,221

 

 
(4,187
)
 
112,034

 
106,305

 

 
(828
)
 
105,477

Total intangible assets, net
$
206,488

 
$
(31,966
)
 
$
(7,484
)
 
$
167,038

 
$
155,375

 
$
(30,558
)
 
$
(3,700
)
 
$
121,117

(1) We acquired certain intangible assets during the first quarter of fiscal year 2012 as a result of our acquisition of Carnegie Learning. Refer to Note 5, Acquisitions.
(2) We recorded an impairment charge of $4.9 million of UNIACC’s intangible assets during the first quarter of fiscal year 2012. See below for further discussion.
In November 2011, UNIACC was advised by the National Accreditation Commission of Chile that its institutional accreditation would not be renewed and therefore had lapsed. UNIACC expects to appeal the decision. The loss of accreditation from the National Accreditation Commission does not impact UNIACC’s ability to operate or confer degrees and does not directly affect UNIACC’s programmatic accreditations. However, this institutional accreditation is necessary for new UNIACC students to participate in government loan programs and for existing students to begin to participate in such programs for the first time. The loss of accreditation has reduced new enrollment in UNIACC’s degree programs due to the unavailability of the government loan programs and, if this action is not reversed, we expect new enrollment will continue to be adversely impacted. Based on these factors and related uncertainty, we revised our cash flow estimates and performed an interim goodwill impairment analysis for UNIACC in the first quarter of fiscal year 2012.
To determine the fair value of the UNIACC reporting unit in our interim step one analysis, we used a discounted cash flow valuation method and assumptions that we believe would be a reasonable market participant’s view of the impact of the loss of

13

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

accreditation status and the increased uncertainty impacting UNIACC. We used significant unobservable inputs (Level 3) in our discounted cash flow valuation. For further discussion of the valuation methods we employ, refer to our 2011 Annual Report on Form 10-K.
Our interim step one goodwill impairment analysis resulted in a lower estimated fair value for the UNIACC reporting unit as compared to its carrying value. Based on the estimated fair value of the UNIACC reporting unit and a hypothetical purchase price allocation, we determined the UNIACC reporting unit would have no implied goodwill. Additionally, our interim impairment tests for the trademark and accreditation intangible asset utilized the same significant unobservable inputs (Level 3) and assumptions used in UNIACC’s interim goodwill analysis and resulted in minimal or no fair value. Accordingly, we determined UNIACC’s entire goodwill balance and the trademark and accreditation indefinite-lived intangible assets totaling $11.9 million and $3.9 million, respectively, were impaired.
We also evaluated UNIACC’s remaining long-lived assets, including property and equipment and finite-lived intangible assets, for recoverability and determined certain finite-lived intangible assets were impaired totaling $1.0 million. In the first quarter of fiscal year 2012, UNIACC’s goodwill and other intangibles impairment charges in the aggregate were $16.8 million, with no income tax benefit as UNIACC’s goodwill and other intangibles are not deductible for tax purposes.
Note 8. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis consist of the following as of February 29, 2012:
 
 
 
Fair Value Measurements at Reporting Date Using
($ in thousands)
February 29, 2012
 
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Cash equivalents (including restricted cash equivalents):
 

 
 

 
 

 
 

Money market funds
$
689,632

 
$
689,632

 
$

 
$

Marketable securities:
 

 
 

 
 

 
 

Auction-rate securities
5,946

 

 

 
5,946

Total assets at fair value on a recurring basis
$
695,578

 
$
689,632

 
$

 
$
5,946

Liabilities:
 

 
 

 
 

 
 

Other liabilities:
 

 
 

 
 

 
 

Interest rate swap
$
2,275

 
$

 
$
2,275

 
$

Total liabilities at fair value on a recurring basis
$
2,275

 
$

 
$
2,275

 
$


14

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis consist of the following as of August 31, 2011:
 
 
 
Fair Value Measurements at Reporting Date Using
($ in thousands)
August 31, 2011
 
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 

 
 

 
 

 
 

Cash equivalents (including restricted cash equivalents):
 

 
 

 
 

 
 

Money market funds
$
1,854,927

 
$
1,854,927

 
$

 
$

Marketable securities:
 

 
 

 
 

 
 

Auction-rate securities
5,946

 

 

 
5,946

Total assets at fair value on a recurring basis
$
1,860,873

 
$
1,854,927

 
$

 
$
5,946

Liabilities:
 

 
 

 
 

 
 

Other liabilities:
 

 
 

 
 

 
 

Interest rate swap
$
3,363

 
$

 
$
3,363

 
$

Total liabilities at fair value on a recurring basis
$
3,363

 
$

 
$
3,363

 
$

We measure the above items on a recurring basis at fair value as follows:
Money market funds — Classified within Level 1 and were valued primarily using real-time quotes for transactions in active exchange markets involving identical assets. As of February 29, 2012 and August 31, 2011, our remaining cash and cash equivalents not disclosed in the above tables approximate fair value because of the short-term nature of the financial instruments.
Auction-rate securities — Classified within Level 3 due to the illiquidity of the market and were valued using a discounted cash flow model encompassing significant unobservable inputs such as estimated interest rates, credit spreads, timing and amount of cash flows, credit quality of the underlying securities and illiquidity considerations.
Interest rate swap — We have an interest rate swap with a notional amount of $36.5 million as of February 29, 2012 used to minimize the interest rate exposure on a portion of BPP’s variable rate debt. The interest rate swap is used to fix the variable interest rate on the associated debt. The swap is classified within Level 2 and is valued using readily available pricing sources which utilize market observable inputs including the current variable interest rate for similar types of instruments.
At February 29, 2012, the carrying value of our debt, excluding capital leases, was $75.8 million. The majority of our debt is variable interest rate debt and the carrying amount approximates fair value.
We did not change our valuation techniques associated with recurring fair value measurements from prior periods. Additionally, there were no changes in the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)  during the six months ended February 29, 2012.
Liabilities measured at fair value on a nonrecurring basis during the first six months of fiscal year 2012 consist of the following:
 
 
 
Fair Value Measurements at Measurement Date Using
 
 
($ in thousands)
Fair Value at
Measurement Date
 
Quoted Prices in
Active Markets for
Identical Liabilities (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Losses for Six Months Ended February 29, 2012
Liabilities:
 

 
 

 
 

 
 

 
 

Other liabilities:
 

 
 

 
 

 
 

 
 

Restructuring obligations
$
22,692

 
$

 
$

 
$
22,692

 
$
(22,692
)
Total liabilities at fair value on a nonrecurring basis
$
22,692

 
$

 
$

 
$
22,692

 
$
(22,692
)

15

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

During the first six months of fiscal year 2012, we recorded aggregate restructuring obligations of $22.7 million associated with abandoning certain leased facilities as part of our real estate rationalization plan. We recorded the restructuring obligation liabilities on the dates we ceased use of the respective facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 4, Restructuring and Other Charges.
Note 9. Accrued Liabilities
Accrued liabilities consist of the following as of February 29, 2012 and August 31, 2011:
($ in thousands)
February 29, 2012
 
August 31, 2011
Securities class action liability
$
160,660

 
$
161,150

Salaries, wages and benefits
91,743

 
93,763

Accrued advertising
36,584

 
50,172

Accrued professional fees
32,882

 
32,607

Unsettled share repurchases
25,461

 

Student refunds, grants and scholarships
7,369

 
17,360

Other accrued liabilities
39,591

 
43,754

Total accrued liabilities
$
394,290

 
$
398,806

Note 10. Debt
Debt and short-term borrowings consist of the following as of February 29, 2012 and August 31, 2011:
($ in thousands)
February 29, 2012
 
August 31, 2011
Bank Facility, see terms below
$

 
$
493,322

BPP Credit Facility, see terms below
41,317

 
47,603

Capital lease obligations
51,709

 
36,512

Other, see terms below
34,484

 
21,572

Total debt
127,510

 
599,009

Less short-term borrowings and current portion of long-term debt
(33,694
)
 
(419,318
)
Long-term debt
$
93,816

 
$
179,691

Bank Facility — In fiscal year 2008, we entered into a syndicated $500 million credit agreement (the “Bank Facility”). The Bank Facility is an unsecured revolving credit facility used for general corporate purposes including acquisitions and stock buybacks. The Bank Facility has an expansion feature for an aggregate principal amount of up to $250 million. The term is five years and will expire on January 4, 2013. The Bank Facility provides a multi-currency sub-limit facility for borrowings in certain specified foreign currencies.
We borrowed substantially all of our credit line under the Bank Facility as of August 31, 2011, which included £63.0 million denominated in British Pounds (equivalent to $103.2 million as of August 31, 2011). We repaid the entire amount borrowed on our Bank Facility during the first quarter of fiscal year 2012.
The Bank Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Bank Facility fee ranges from 12.5 to 17.5 basis points and the incremental fees for borrowings under the facility range from LIBOR + 50.0 to 82.5 basis points. The weighted average interest rate on outstanding borrowings under the Bank Facility at August 31, 2011 was 2.8%.
The Bank Facility contains affirmative and negative covenants, including the following financial covenants: maximum leverage ratio, minimum coverage interest and rent expense ratio, and a U.S. Department of Education financial responsibility composite score. In addition, there are covenants restricting indebtedness, liens, investments, asset transfers and distributions. We were in compliance with all covenants related to the Bank Facility at February 29, 2012.


16

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

BPP Credit Facility — In fiscal year 2010, we refinanced BPP’s debt by entering into a £52.0 million (equivalent to $82.5 million as of February 29, 2012) secured credit agreement (the “BPP Credit Facility”). During the second quarter of fiscal year 2012, we amended the BPP Credit Facility reducing the amount available under the facility to £39.0 million (equivalent to $61.9 million as of February 29, 2012). The BPP Credit Facility contains term debt, which was used to refinance BPP’s debt in fiscal year 2010, and revolving credit facilities used for working capital and general corporate purposes. The BPP credit facility will expire on August 31, 2013.
The amended BPP Credit Facility contains financial covenants that include a minimum fixed charge coverage ratio and a maximum leverage ratio, which we were in compliance with as of February 29, 2012. The interest rate on borrowings is LIBOR + 175 basis points. The weighted average interest rate on BPP’s outstanding borrowings at February 29, 2012 and August 31, 2011 was 2.7% and 4.0%, respectively.
Other Debt As of February 29, 2012, other debt includes the present value of our obligation to Carnegie Mellon University, which is discussed further at Note 5, Acquisitions. Other debt also includes $8.7 million of variable rate debt and $10.9 million of fixed rate debt as of February 29, 2012, and $9.1 million of variable rate debt and $12.5 million of fixed rate debt as of August 31, 2011. Excluding our obligation to Carnegie Mellon University, the weighted average interest rate on our other debt at February 29, 2012 and August 31, 2011 was 5.0% and 6.1%, respectively.
Refer to Note 8, Fair Value Measurements, for discussion of the fair value of our debt.
Note 11. Other Liabilities
Other liabilities consist of the following as of February 29, 2012 and August 31, 2011:
($ in thousands)
February 29, 2012
 
August 31, 2011
Deferred rent and other lease incentives
$
105,854

 
$
90,761

Restructuring obligations
38,322

 
17,802

Deferred gains on sale-leasebacks
29,889

 
31,288

Uncertain tax positions
29,239

 
28,218

Other
58,248

 
46,401

Total other liabilities
261,552

 
214,470

Less current portion
(55,785
)
 
(50,131
)
Total other long-term liabilities
$
205,767

 
$
164,339


17

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Note 12. Shareholders’ Equity
The following tables detail changes in shareholders’ equity during the six months ended February 29, 2012 and February 28, 2011:
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Additional Paid-in Capital
 
Treasury Stock Class A
 
 
 
Accumulated Other Comprehensive Loss
 
Total Apollo Shareholders’ Equity
 
Non-controlling (Deficit) Interests
 
 
 
Stated Value
 
Stated Value
 
 
 
Retained Earnings
 
 
 
 
Total Equity
($ in thousands)
 
 
 
Cost
 
 
 
 
 
Balance as of August 31, 2011
$
103

 
$
1

 
$
68,724

 
$
(3,125,175
)
 
$
4,320,472

 
$
(23,761
)
 
$
1,240,364

 
$
3,625

 
$
1,243,989

Treasury stock purchases

 

 

 
(412,177
)
 

 

 
(412,177
)
 

 
(412,177
)
Treasury stock issued under stock purchase plans

 

 
(430
)
 
3,134

 

 

 
2,704

 

 
2,704

Treasury stock issued under stock incentive plans

 

 
(16,940
)
 
23,572

 

 

 
6,632

 

 
6,632

Tax effect for stock incentive plans

 

 
(1,906
)
 

 

 

 
(1,906
)
 

 
(1,906
)
Share-based compensation

 

 
40,492

 

 

 

 
40,492

 

 
40,492

Currency translation adjustment, net of tax

 

 

 

 

 
(3,805
)
 
(3,805
)
 
(823
)
 
(4,628
)
Net income (loss)

 

 

 

 
213,196

 

 
213,196

 
(4,741
)
 
208,455

Balance as of February 29, 2012
$
103

 
$
1

 
$
89,940

 
$
(3,510,646
)
 
$
4,533,668

 
$
(27,566
)
 
$
1,085,500

 
$
(1,939
)
 
$
1,083,561

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Additional Paid-in Capital
 
Treasury Stock Class A
 
 
 
Accumulated Other Comprehensive Loss
 
Total Apollo Shareholders’ Equity
 
Non-controlling (Deficit) Interests
 
 
 
Stated Value
 
Stated Value
 
 
 
Retained Earnings
 
 
 
 
Total Equity
($ in thousands)
 
 
 
Cost
 
 
 
 
 
Balance as of August 31, 2010
$
103

 
$
1

 
$
46,865

 
$
(2,407,788
)
 
$
3,748,045

 
$
(31,176
)
 
$
1,356,050

 
$
32,690

 
$
1,388,740

Treasury stock purchases

 

 

 
(252,003
)
 

 

 
(252,003
)
 

 
(252,003
)
Treasury stock issued under stock purchase plans

 

 
(1,310
)
 
4,547

 

 

 
3,237

 

 
3,237

Treasury stock issued under stock incentive plans

 

 
(4,836
)
 
7,681

 

 

 
2,845

 

 
2,845

Tax effect for stock incentive plans

 

 
(1,563
)
 

 

 

 
(1,563
)
 

 
(1,563
)
Share-based compensation

 

 
30,490

 

 

 

 
30,490

 

 
30,490

Currency translation adjustment, net of tax

 

 

 

 

 
4,106

 
4,106

 
655

 
4,761

Change in fair value of auction-rate securities, net of tax

 

 

 

 

 
463

 
463

 

 
463

Noncontrolling interest contributions(1)

 

 

 

 

 

 

 
6,875

 
6,875

Net income (loss)

 

 

 

 
171,375

 

 
171,375

 
(32,780
)
 
138,595

Balance as of February 28, 2011
$
103

 
$
1

 
$
69,646

 
$
(2,647,563
)
 
$
3,919,420

 
$
(26,607
)
 
$
1,315,000

 
$
7,440

 
$
1,322,440

(1) There was no change in our 85.6% ownership interest in Apollo Global during the six months ended February 28, 2011.
Share Reissuances
During the three months ended February 29, 2012 and February 28, 2011, we issued approximately 0.3 million and 0.1 million shares, respectively, and during the six months ended February 29, 2012 and February 28, 2011, we issued approximately 0.5 million and 0.2 million shares, respectively, of our Apollo Group Class A common stock from our treasury stock. These reissuances are a result of stock option exercises, release of shares covered by vested restricted stock units, and purchases under our employee stock purchase plan.
Share Repurchases
Our Board of Directors has authorized us to repurchase outstanding shares of Apollo Group Class A common stock, from time to time, depending on market conditions and other considerations. During the first quarter of fiscal year 2012, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of $500 million. There is no expiration date on the repurchase authorizations and repurchases occur at our discretion.
We repurchased approximately 6.4 million and 1.8 million shares of our Apollo Group Class A common stock at a total cost of $328.8 million and $75.0 million during the three months ended February 29, 2012 and February 28, 2011, respectively. This represented weighted average purchase prices of $51.65 and $42.75 per share during the respective periods. During the six months ended February 29, 2012 and February 28, 2011, we repurchased approximately 8.1 million and 6.5 million shares of our Apollo Group Class A common stock at a total cost of approximately $407.0 million and $251.5 million, respectively. This represented weighted average purchase prices of $50.42 and $38.99 per share during the respective periods. At February 29, 2012, $25.5 million was recorded in accrued liabilities in our Condensed Consolidated Balance Sheets for repurchased shares that settled subsequent to February 29, 2012.

18

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Subsequent to February 29, 2012, we repurchased 2.2 million shares for $92.5 million resulting in $0.5 million remaining under our share repurchase authorization. The amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases may be made on the open market through various methods including but not limited to accelerated share repurchase programs, or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs.
In connection with the release of vested shares of restricted stock, we repurchased approximately 53,000 and 1,000 shares of Class A common stock for $2.8 million and $0.1 million during the three months ended February 29, 2012 and February 28, 2011, respectively. During the six months ended February 29, 2012 and February 28, 2011, we repurchased approximately 105,000 and 14,000 shares of Class A common stock for $5.2 million and $0.5 million, respectively. These repurchases relate to tax withholding requirements on the restricted stock units and do not fall under the repurchase program described above.
Note 13. Earnings Per Share
Our outstanding shares consist of Apollo Group Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Apollo Group Class A and Class B common stock in an identical manner. As such, both the Apollo Group Class A and Class B common stock are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units and performance share awards. The components of basic and diluted earnings per share are as follows:
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
Net income (loss) attributable to Apollo (basic and diluted)
$
63,882

 
$
(64,038
)
 
$
213,196

 
$
171,375

Basic weighted average shares outstanding
125,298

 
142,354

 
127,808

 
144,364

Dilutive effect of stock options
341

 

 
183

 
102

Dilutive effect of restricted stock units and performance share awards
828

 

 
738

 
192

Diluted weighted average shares outstanding
126,467

 
142,354

 
128,729

 
144,658

Earnings (loss) per share:
 

 
 

 
 
 
 
Basic income (loss) per share attributable to Apollo
$
0.51

 
$
(0.45
)
 
$
1.67

 
$
1.19

Diluted income (loss) per share attributable to Apollo
$
0.51

 
$
(0.45
)
 
$
1.66

 
$
1.18

Due to the loss from continuing operations attributable to Apollo in the three months ended February 28, 2011, no dilutive share-based awards were included in the calculation of diluted loss per share because they would have been anti-dilutive.
During the three months ended February 29, 2012 and February 28, 2011, approximately 6.2 million and 9.6 million, respectively, of our stock options outstanding and approximately 189,000 and 718,000, respectively, of our restricted stock units and performance share awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. These options, restricted stock units and performance share awards could be dilutive in the future.
During the six months ended February 29, 2012 and February 28, 2011, approximately 7.7 million and 9.6 million, respectively, of our stock options outstanding and approximately 2,000 and 297,000, respectively, of our restricted stock units and performance share awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. These options, restricted stock units and performance share awards could be dilutive in the future.


19

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Note 14. Share-Based Compensation
The table below details share-based compensation expense for the three and six months ended February 29, 2012 and February 28, 2011:
 
Three Months Ended
 
Six Months Ended
($ in thousands)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
Instructional and student advisory
$
6,701

 
$
6,240

 
$
14,123

 
$
11,721

Marketing
1,706

 
1,323

 
3,940

 
2,709

Admissions advisory
425

 
601

 
872

 
1,157

General and administrative
10,768

 
7,294

 
21,557

 
14,903

Share-based compensation expense
$
19,600

 
$
15,458

 
$
40,492

 
$
30,490

In accordance with our Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, we granted approximately 5,000 and 9,000 stock options during the three and six months ended February 29, 2012, respectively. The weighted average grant date fair value was $18.59 and $17.37 for the three and six months ended February 29, 2012, respectively, and the weighted average exercise price of these options was $50.08 and $46.74 for the three and six months ended February 29, 2012, respectively. As of February 29, 2012, there was approximately $23.4 million of total unrecognized share-based compensation cost, net of forfeitures, related to unvested stock options and stock appreciation rights.
In accordance with our Apollo Group, Inc. Amended and Restated 2000 Stock Incentive Plan, we granted approximately 19,000 and 86,000 restricted stock units and performance share awards during the three and six months ended February 29, 2012, respectively, that had a weighted average grant date fair value of $50.79 and $44.87, respectively. As of February 29, 2012, there was approximately $91.0 million of total unrecognized share-based compensation expense, net of forfeitures, related to unvested restricted stock units and performance share awards.
Note 15. Commitments and Contingencies
Contingencies Related to Litigation and Other Proceedings
The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.
Securities Class Action (Policeman’s Annuity and Benefit Fund of Chicago)
In January 2008, a jury returned an adverse verdict against us and two remaining individual co-defendants in a securities class action lawsuit entitled, In re Apollo Group, Inc. Securities Litigation, Case No. CV04-2147-PHX-JAT, filed in the U.S. District Court for the District of Arizona, relating to alleged false and misleading statements in connection with our failure to publicly disclose the contents of a preliminary U.S. Department of Education program review report. After various post-trial challenges, the case was returned to the trial court in March 2011 to administer the shareholder claims process. In September 2011, we entered into an agreement in principle with the plaintiffs to settle the litigation for $145.0 million, which was preliminarily approved by the Court on November 28, 2011. Based on the terms of the Court’s preliminary approval, we placed $145.0 million into a common fund account on December 5, 2011, which is presented as restricted funds held for legal matter on our Condensed Consolidated Balance Sheets as of February 29, 2012. Our remaining accrual of $160.7 million as of February 29, 2012 represents the $145.0 million settlement, an estimate of the disputed amount we may be required to reimburse our insurance carriers for defense costs advanced to us, and estimated future legal costs. The settlement agreement is subject to final approval by the Court, and the Court has scheduled a Final Approval Hearing for April 16, 2012.
Securities Class Action (Apollo Institutional Investors Group)
On August 13, 2010, a securities class action complaint was filed in the U.S. District Court for the District of Arizona by Douglas N. Gaer naming us, John G. Sperling, Gregory W. Cappelli, Charles B. Edelstein, Joseph L. D’Amico, Brian L. Swartz and Gregory J. Iverson as defendants for allegedly making false and misleading statements regarding our business practices and prospects for growth. That complaint asserted a putative class period stemming from December 7, 2009 to August 3, 2010. A substantially similar complaint was also filed in the same Court by John T. Fitch on September 23, 2010 making similar allegations against the same defendants for the same purported class period. Finally, on October 4, 2010, another purported securities class action complaint was filed in the same Court by Robert Roth against the same defendants as well as Brian

20

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Mueller, Terri C. Bishop and Peter V. Sperling based upon the same general set of allegations, but with a defined class period of February 12, 2007 to August 3, 2010. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On October 15, 2010, three additional parties filed motions to consolidate the related actions and be appointed the lead plaintiff.
On November 23, 2010, the Fitch and Roth actions were consolidated with Gaer and the Court appointed the “Apollo Institutional Investors Group” consisting of the Oregon Public Employees Retirement Fund, the Mineworkers’ Pension Scheme, and Amalgamated Bank as lead plaintiffs. The case is now entitled, In re Apollo Group, Inc. Securities Litigation, Lead Case Number CV-10-1735-PHX-JAT. On February 18, 2011, the lead plaintiffs filed a consolidated complaint naming Apollo, John G. Sperling, Peter V. Sperling, Joseph L. D’Amico, Gregory W. Cappelli, Charles B. Edelstein, Brian L. Swartz, Brian E. Mueller, Gregory J. Iverson, and William J. Pepicello as defendants. The consolidated complaint asserts a putative class period of May 21, 2007 to October 13, 2010. On April 19, 2011, we filed a motion to dismiss and oral argument on the motion was held before the Court on October 17, 2011. On October 27, 2011, the Court granted our motion to dismiss and granted plaintiffs leave to amend. On December 6, 2011, the lead plaintiffs filed an Amended Consolidated Class Action Complaint, which alleges similar claims against the same defendants. On January 9, 2012, we filed a motion to dismiss the Amended Consolidated Class Action Complaint, which is currently pending before the Court.
Discovery in this case has not yet begun. We anticipate that the plaintiffs will seek substantial damages, including damages representing the aggregate investment losses attributable to the alleged false and misleading statements by all shareholders who purchased shares during the 29-month putative class period and still held those shares on October 13, 2010. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Securities Class Action (Teamsters Local 617 Pensions and Welfare Funds)
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action complaint purporting to represent a class of shareholders who purchased our stock between November 28, 2001 and October 18, 2006. The complaint, filed in the U.S. District Court for the District of Arizona, is entitled Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al., Case Number 06-cv-02674-RCB, and alleges that we and certain of our current and former directors and officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by purportedly making misrepresentations concerning our stock option granting policies and practices and related accounting. The defendants are Apollo Group, Inc., J. Jorge Klor de Alva, Daniel E. Bachus, John M. Blair, Dino J. DeConcini, Kenda B. Gonzales, Hedy F. Govenar, Brian E. Mueller, Todd S. Nelson, Laura Palmer Noone, John R. Norton III, John G. Sperling and Peter V. Sperling. On September 11, 2007, the Court appointed The Pension Trust Fund for Operating Engineers as lead plaintiff. Lead plaintiff filed an amended complaint on November 23, 2007, asserting the same legal claims as the original complaint and adding claims for violations of Section 20A of the Securities Exchange Act of 1934 and allegations of breach of fiduciary duties and civil conspiracy.
On January 22, 2008, all defendants filed motions to dismiss. On March 31, 2009, the Court dismissed the case with prejudice as to Daniel Bachus, Hedy Govenar, Brian E. Mueller, Dino J. DeConcini, and Laura Palmer Noone. The Court also dismissed the case as to John Sperling and Peter Sperling, but granted plaintiffs leave to file an amended complaint against them. Finally, the Court dismissed all of plaintiffs’ claims concerning misconduct before November 2001 and all of the state law claims for conspiracy and breach of fiduciary duty. On April 30, 2009, plaintiffs filed their Second Amended Complaint, which alleges similar claims for alleged securities fraud against the same defendants. On June 15, 2009, all defendants filed another motion to dismiss the Second Amended Complaint. On February 22, 2010, the Court partially granted the plaintiffs’ motion for reconsideration, but withheld a final determination on the individual defendants pending the Court’s ruling on the motion to dismiss the Second Amended Complaint.
On March 31, 2011, the U.S. District Court for the District of Arizona dismissed the case with prejudice and entered judgment in our favor. Plaintiffs filed a motion for reconsideration of this ruling, and that motion remains pending before the Court. If their motion for reconsideration is not successful, plaintiffs have indicated they will appeal the Court’s dismissal of their complaint. The outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Incentive Compensation False Claims Act Lawsuit
On May 25, 2011, we were notified that a qui tam complaint had been filed against us in the U.S. District Court, Eastern District of California, by private relators under the Federal False Claims Act and California False Claims Act, entitled USA and State of California ex rel. Hoggett and Good v. University of Phoenix, et al, Case Number 2:10-CV-02478-MCE-KJN. When the federal

21

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if successful, they are entitled to receive a portion of the federal government’s recovery.
The complaint alleges, among other things, that University of Phoenix has violated the Federal False Claims Act since December 12, 2009 and the California False Claims Act for the preceding ten years by falsely certifying to the U.S. Department of Education and the State of California that University of Phoenix was in compliance with various regulations that require compliance with federal rules regarding the payment of incentive compensation to admissions personnel, in connection with University of Phoenix’s participation in student financial aid programs. In addition to injunctive relief and fines, the relators seek significant damages on behalf of the Department of Education and the State of California, including all student financial aid disbursed by the Department to our students since December 2009 and by the State of California to our students during the preceding ten years. On July 12, 2011, we filed a motion to dismiss and on August 30, 2011, relators filed a motion for leave to file a Second Amended Complaint, which the Court granted. On November 2, 2011, we filed a motion to dismiss relators’ Second Amended Complaint, and that motion is currently pending before the Court.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Patent Infringement Litigation
On March 3, 2008, Digital-Vending Services International Inc. filed a complaint against University of Phoenix and Apollo Group Inc., as well as Capella Education Company, Laureate Education Inc., and Walden University Inc. in the U.S. District Court for the Eastern District of Texas, since transferred on plaintiff’s motion to the Eastern District of Virginia. The case is entitled, Digital Vending Services International, LLC vs. The University of Phoenix, et al, Case Number 2:09cv555 (JBF-TEM). The complaint alleges that we and the other defendants have infringed and are infringing various patents relating to managing courseware in a shared use operating environment and seeks injunctive relief and monetary damages. We filed an answer to the complaint on May 27, 2008, in which we denied that Digital-Vending Services International’s patents were duly and lawfully issued, and asserted defenses of non-infringement and patent invalidity, among others. We also asserted a counterclaim seeking a declaratory judgment that the patents are invalid, unenforceable, and not infringed by us.
On March 18, 2010, we filed our opening claim construction brief and on June 10, 2010, the Court issued its claim construction ruling. Discovery is now concluded and we filed a motion for summary judgment on August 13, 2010. A hearing on our motion for summary judgment was held on November 12, 2010, and on January 7, 2011, the Court granted our motion for summary judgment and dismissed the case with prejudice, citing plaintiff’s failure to point to admissible evidence that could support a finding of infringement.
Plaintiff appealed the order granting our summary judgment motion to the United States Court of Appeals for the Federal Circuit, which held oral argument on December 5, 2011. On March 7, 2012, a divided three-judge panel of the Federal Circuit issued an opinion affirming in part and reversing in part the order granting summary judgment, and it remanded a portion of the plaintiff’s claims to the district court for further proceedings. We plan to file a Petition for Rehearing with the Federal Circuit regarding the portion of the decision reversing the grant of summary judgment. The outcome of this legal proceeding is uncertain at this point. During fiscal year 2011, we accrued an immaterial amount which reflects our settlement offer in connection with this action.
Adoma Wage and Hour Class Action
On January 8, 2010, Diane Adoma filed an action in United States District Court, Eastern District of California alleging wage and hour claims under the Fair Labor Standards Act and California law for failure to pay overtime and other violations, entitled Adoma et al. v. University of Phoenix, et al, Case Number 2:10-cv-04134-JCJ. On March 5, 2010, we filed a motion to dismiss, or in the alternative to stay or transfer, the case based on the previously filed Sabol and Juric actions. On May 3, 2010, the Court denied the motion to dismiss and/or transfer. On April 12, 2010, plaintiff filed her motion for conditional collective action certification. The Court denied class certification under the Fair Labor Standards Act and transferred these claims to the District Court in Pennsylvania. On August 31, 2010, the U.S. District Court in California granted plaintiff’s motion for class action certification of the California claims. On September 14, 2010, we filed a petition for permission to appeal the class certification order with the Ninth Circuit, which was denied on November 3, 2010. There are approximately 1,500 current and former employees in the class.
In August 2011, the parties agreed to settle the case for an immaterial amount, which was accrued in our financial statements during fiscal year 2011. The agreement, in which we do not admit any liability, is subject to pending approval by the Court.

22

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Shareholder Derivative Actions and Demand Letters
On November 12, 2010 and December 8, 2010, we received separate demands on behalf of two different shareholders to investigate, address and commence proceedings against each of our directors and certain of our officers for violation of any applicable laws, including in connection with the subject matter of the report of the Government Accountability Office prepared for the U.S. Senate in August 2010, our withdrawal of the outlook we previously provided for our fiscal year 2011, the investigation into possible unfair and deceptive trade practices associated with certain alleged practices of University of Phoenix by the State of Florida Office of the Attorney General in Fort Lauderdale, Florida, the participation by the State of Oregon Office of the Attorney General in the Securities Class Action (Apollo Institutional Investors Group), and the informal inquiry by the Enforcement Division of the Securities and Exchange Commission commenced in October 2009. On September 8, 2011, we received an additional shareholder demand letter from Darlene Smith, who is already pursuing one of the two previously filed shareholder derivative actions against Apollo management. In this letter, Ms. Smith requests that the Company pursue a contribution action against Todd Nelson and Kenda Gonzales based on the jury verdict in the Policeman’s Annuity and Benefit Fund of Chicago Securities Class Action described above. The demands are a condition precedent under applicable Arizona law to the filing of a derivative lawsuit on behalf of Apollo Group seeking damages from directors and officers for breach of fiduciary duty. The following two lawsuits have commenced to date in connection with these demands:
Himmel Derivative Action. On March 24, 2011, a shareholder derivative complaint was filed in the Superior Court for the State of Arizona, Maricopa County by Daniel Himmel, one of the foregoing shareholders who previously made a demand for investigation. In the complaint, the plaintiff asserts a derivative claim on our behalf against certain of our current and former officers and directors for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that the individual defendants made improper statements and engaged in improper business practices that caused our stock price to drop, led to securities class actions against us, and enhanced regulation and scrutiny by various government entities and regulators. The case is entitled, Himmel v. Bishop, et al, Case Number CV2011-005604. Pursuant to a stipulation between all parties, on August 31, 2011, the Court ordered this action stayed during the pendency of the underlying Apollo Group Institutional Investors Securities Class Action.
Smith Derivative Action. On April 12, 2011, a shareholder derivative complaint was filed in the U.S. District Court for the District of Arizona by Darlene Smith, one of the foregoing shareholders who previously made a demand for investigation. In the complaint, the plaintiff asserts a derivative claim on our behalf against certain of our current and former officers and directors for violations of federal securities laws, state law claims for breaches of fiduciary duty, abuse of control, gross mismanagement, unjust enrichment, corporate waste, and insider trading. The case is entitled, Smith v. Sperling, et al, Case Number CV-11-0722-PHX-PGR. On February 3, 2012, the Company and the individual defendants filed motions to dismiss the case, which are currently pending with the Court.
K.K. Modi Investment and Financial Services Pvt. Ltd.
On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo Group, Inc., Western International University, Inc., University of Phoenix, Inc., Apollo Global, Inc., Modi Apollo International Group Pvt. Ltd., Apollo International, Inc., John G. Sperling, Peter V. Sperling and Jorge Klor De Alva, seeking to permanently enjoin the defendants from making investments in the education industry in the Indian market in breach of an exclusivity and noncompete provision which plaintiff alleges is applicable to Apollo Group and its subsidiaries. The case is entitled, K.K. Modi Investment and Financial Services Pvt. Ltd. v. Apollo International, et. al. We believe that the relevant exclusivity and noncompete provision is inapplicable to us and our affiliates, we have sought to dismiss this action on those grounds, and our application for such relief remains pending before the Court. On December 14, 2010, the Court declined to enter an injunction, but the matter is set for a further hearing on May 16, 2012. If plaintiff ultimately obtains the requested injunctive relief, our ability to conduct business in India, including through our joint venture with HT Media Limited, may be adversely affected. It is also possible that in the future K.K. Modi may seek to expand existing litigation in India or commence litigation in the U.S. in which it may assert a significant damage claim against us.
Other
We are subject to various claims and contingencies in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.

23

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Other Matters
Attorney General Investigations
During fiscal year 2011, we received notices from the Attorney General Offices in three states that they were investigating business practices at the University of Phoenix, as described below. We believe there may be an informal coalition of states considering investigatory or other inquiries into recruiting practices and the financing of education at proprietary educational institutions, which may or may not include these three states.
State of Florida. On October 22, 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of University of Phoenix. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of University of Phoenix’s business. We are cooperating with the investigation, but also filed a suit to quash or limit the subpoena and to protect information sought that constitutes propriety or trade secret information. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
State of Massachusetts. On May 13, 2011, University of Phoenix received a Civil Investigative Demand from the State of Massachusetts Office of the Attorney General. The Demand relates to an investigation of possible unfair or deceptive methods, acts, or practices by for-profit educational institutions in connection with the recruitment of students and the financing of education. The Demand requires us to produce documents and detailed information and to give testimony regarding a broad spectrum of University of Phoenix’s business for the time period of January 1, 2002 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
State of Delaware. On August 3, 2011, University of Phoenix received a subpoena from the Attorney General of the State of Delaware to produce detailed information regarding University of Phoenix students residing in Delaware. The time period covered by the subpoena is January 1, 2006 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
Securities and Exchange Commission Informal Inquiry
During October 2009, we received notification from the Enforcement Division of the Securities and Exchange Commission indicating that they had commenced an informal inquiry into our revenue recognition practices. The Securities and Exchange Commission has requested various information and documents from us and/or our auditors, including information regarding our revenue recognition practices, our policies and practices relating to student refunds, the return of Title IV funds to lenders and bad debt reserves, our insider trading policies and procedures, a chronology of the internal processing and availability of information about the U.S. Department of Education program review of University of Phoenix commenced in early 2009, certain information relating to non-Title IV revenue sources and other matters. On March 21, 2012, the staff of the Securities and Exchange Commission notified us that the informal inquiry had been completed and that the staff did not intend to recommend any enforcement action by the Commission.
Note 16. Regulatory Matters
Student Financial Aid
In fiscal year 2011, University of Phoenix generated 91% of our total consolidated net revenue and more than 100% of our operating income, and 86% of its cash basis revenue for eligible tuition and fees was derived from Title IV financial aid program funds, as calculated under the 90/10 Rule.
All U.S. federal financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. In August 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. Changes to the Higher Education Act are likely to result from subsequent reauthorizations, and the scope and substance of any such changes cannot be predicted.
The Higher Education Opportunity Act specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification.

24

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

University of Phoenix was recertified in November 2009 and entered into a new Title IV Program Participation Agreement which expires December 31, 2012.
Western International University was recertified in May 2010 and entered into a new Title IV Program Participation Agreement which expires September 30, 2014.
Accreditation
University of Phoenix and Western International University are accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools (“HLC”). This accreditation provides the following:
recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;
qualification to participate in Title IV programs (in combination with state higher education operating and degree granting authority); and
qualification for authority to operate in certain states.
The HLC began its previously scheduled comprehensive evaluation visit of University of Phoenix in March 2012, and is expected to perform its scheduled reaffirmation visit of Western International University in fiscal year 2012.
Note 17. Segment Reporting
We operate primarily in the education industry. We have organized our segments using a combination of factors primarily focusing on the type of educational services provided and products delivered. Our operating segments are managed in the following four reportable segments:
1. 
University of Phoenix;
2.
Apollo Global — BPP;
3. 
Apollo Global — Other; and
4. 
Other Schools.
The Apollo Global — Other reportable segment includes Western International University, UNIACC, ULA and the Apollo Global corporate operations. The Other Schools reportable segment includes IPD and CFFP, as well as Meritus University, Inc. until its closure in fiscal year 2011. The Corporate caption in our segment reporting includes adjustments to reconcile segment results to consolidated results, which primarily consist of net revenue and corporate charges that are not allocated to our reportable segments. Please refer to our 2011 Annual Report on Form 10-K for further discussion of our segments.
We acquired Carnegie Learning during the first quarter of fiscal year 2012 and it is included in our University of Phoenix operating segment from the date of acquisition. Refer to Note 5, Acquisitions.

25

APOLLO GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

A summary of financial information by reportable segment is as follows:
 
Three Months Ended
 
Six Months Ended
($ in thousands)
February 29, 2012
 
February 28, 2011
 
February 29, 2012
 
February 28, 2011
Net revenue
 

 
 

 
 
 
 
University of Phoenix
$
885,312

 
$
962,684

 
$
1,942,381

 
$
2,160,475

Apollo Global:
 
 
 
 
 
 
 
BPP
52,949

 
52,027

 
133,030

 
131,765

Other
13,845

 
13,650

 
36,521

 
37,138

Total Apollo Global
66,794

 
65,677

 
169,551

 
168,903

Other Schools
17,446

 
18,926

 
36,310

 
44,195

Corporate

 
1,342

 

 
1,491

Total net revenue
$
969,552

 
$
1,048,629

 
$
2,148,242

 
$
2,375,064

Operating income (loss):
 

 
 

 
 
 
 
University of Phoenix(1)
$
140,742

 
$
231,639

 
$
432,780

 
$
639,073

Apollo Global:
 
 
 
 
 
 
 
BPP(2)